Our multi-asset investment views - June 2020
Our multi-asset investment views - June 2020
MAIN ASSET CLASSES
We believe the sectors that are more sensitive to the economic cycle can catch up with the strong performance of defensive shares (equities that tend to be more stable during economic cycle) as the global economy reopens over the coming months. Overall, the fundamental outlook is still weak but inflows into markets continue to support prices.
We remain neutral. With prices remaining at historically high levels, the effectiveness of bonds as a ‘protection position’ has deteriorated.
We have upgraded our view. Commodities appear to have reached their low point for the moment and a price recovery has started, led by the energy sector.
We remain positive on corporate bonds overall, driven by central bank financing programmes on both sides of the Atlantic, combined with a reduction in interest rates across developed and emerging markets (EM).
With price levels having rebounded close to all-time highs, we expect other regions to catch up as the global economy reopens. We remain neutral for now.
Our view on UK equities is unchanged due to continued price weakness caused by lockdown measures added to renewed concerns over a no-deal Brexit.
Europe is now our preferred equity market, as the European Central Bank (ECB) continues to support shares’ liquidity while the prospect of fiscal coordination between eurozone countries is reducing concerns about the political outlook.
The cyclicality of the market, a large fiscal response and the relatively limited economic impact from the virus in Japan should allow for further recovery in share prices.
We have upgraded our score as fiscal and monetary policy have dampened the impact of lockdowns.
We remain neutral. The potential for increased trade tensions between China and the rest of the world continues. We continue to favour the cyclical and technology-heavy markets of Korea and Taiwan.
At current yield levels, we believe that US Treasuries will struggle to deliver significant returns. However, we are less negative compared to some European markets where yields are even lower.
Relative to other developed markets, such as the US, we believe there is less value in UK government bonds given their relatively poor relative return, which may lead to investor outflows in the coming months.
The proposed €750 billion European Recovery Fund will effectively mean debt mutualisation within the eurozone (debt sharing between EU countries), which is negative for German interest rates.
The Bank of Japan continues to expand monetary policy in the form of liquidity for businesses, while the government also tries to alleviate the damage caused by the virus.
US inflation linked bonds
Although published inflation data has been weak, we remain neutral as the short-term direction is not clear.
Emerging markets local currency bonds
EM valuations remain attractive, particularly in longer maturity bonds, with inflation less of a concern than in previous crises in view of its relatively low starting point.
Investment grade credit
We remain positive as the Federal Reserve’s (Fed) support measures – it has moved to buy these bonds - continue to benefit the US investment grade (IG) market.
Although we still prefer US investment grade (IG) corporate bonds, we see support from the ECB helping to underpin the market for the foreseeable future.
Emerging markets USD
We have downgraded EM sovereign credit based on prices and the ongoing deterioration in credit quality (issuing companies’ ability to pay back their debt) of some of the lower ranked names.
High yield bonds (non-investment grade)
We remain positive as US central bank policy initiatives continue to support the high yield (HY) market.
The expansion of the Pandemic Emergency Purchase Programme leads us to upgrade HY corporate bonds. The programme now provides a bridge to the European Recovery Fund, which should become effective in 2021 and support HY bond issuers.
There is less surplus oil following OPEC cuts (supply reductions now continuing til end July) and, with activity recovering, demand for inventory has also increased.
Central banks remain dovish, providing ample liquidity where necessary. As a result, we expect gold prices could continue to rise from current levels.
Positive as the fall in metal prices has run its course, and a strong recovery has been observed in construction data from China, as well as in infrastructure spending.
Agriculture markets have levelled out for the time being. We remain aware of the backdrop of weaker economic demand and the re-emergence of US-China trade tensions.
The weak growth outlook should support the dollar strength; however, its expensive price level and the effect of the Fed’s liquidity measures mean we remain neutral.
Due to the better range of cyclical opportunities on offer now in Europe and the return of Brexit uncertainty, we downgrade sterling to neutral.
Upgraded to positive as the ECB has triggered a meaningful monetary response and the launch of credible fiscal action from EU members. Although the euro has appreciated significantly since the announcement of the recovery fund, we expect further upside.
While liquidity and signs of an economic recovery are providing positive momentum, the risks of a pull-back driven by fundamentals warrant a neutral score.
Swiss franc ₣
We remain neutral on the Swiss franc given its high price, while acknowledging its continued role as a safe haven currency.
Source: Schroders, June 2020. The views for equities, government bonds and commodities are based on return relative to cash in local currency. The views for corporate bonds and high yield are based on credit spreads (i.e. duration-hedged). The views for currencies are relative to the US dollar, apart from the US dollar which is relative to a trade-weighted basket.
Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
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